Question 

Can you please advise me whether vodacom shares are shariah compliant?

If not-is it totally haraam or can i review the financial statements and eliminate the haraam portion when I do sell my shares or recieve my dividends

Answer.

In the name of Allah, Most Gracious, Most Merciful

Assalaamu `alaykum waRahmatullahi Wabarakatoh

After investigating the investment scheme released by Vodacom SA known as YeboYethu, we conclude that it will not be permissible to invest in such a scheme even according to such ‘Ulamā that deem shares permissible. There are elements of ribā (interest) and gharar (uncertainty) or sharā’it fāsidah (corruptive conditions) depending on the two different angles that are considered.

Hereunder are an explanation of the investment scheme and a description of its integral workings. 

Vodacom SA is offering to sell 6.25 % of its share capital (300 million shares) to “black companies” and the “black public”. The remaining 93.75% (4.5 billion shares) will remain in the ownership of the Vodacom Group. The 6.25% will be divided between three separate and independent companies, namely, Thebe who is to acquire 0.84% (40.5 million shares), Royal Bafokeng who is to acquire 1.97% (94.5 million) and YeboYethu who is to acquire the remaining 3.44% (90 million). Thebe and Royal Bafokeng are independent companies referred to as the “Strategic Partners” that will purchase Vodacom SA shares directly. However, YeboYethu is a company incorporated for the sole purpose of purchasing shares from Vodacom SA for the general black public and ESOP (YeboYethu Employee Participation Trust). Therefore, ESOP and the public will be indirectly buying shares into Vodacom SA through the YeboYethu Company in the form of YeboYethu shares. From the 3.44% allocated to YeboYethu, 55% is to be acquired by the black public and the remaining 45% by ESOP. The following diagram provided by Vodacom SA in their prospectus will illustrate the share distribution:

To get a preliminary Shar‘ī understanding of this breakdown, we will entertain the supposition of those who deem shares permissible and consider that Vodacom Group who owns Vodacom SA is selling a percentage of its share capital which would represent a “partnership”. Thebe and Royal Bafokeng will become direct “partners” with Vodacom Group and that YeboYethu will become a Wakīl for the public and ESOP to become indirect “partners” in Vodacom SA.

Before proceeding, certain important points must be born in mind:

1.     YeboYethu’s only asset is the shares that it will purchase for its shareholders.

2.     To facilitate the purchase of the Vodacom SA shares, YeboYethu is inviting the public to purchase YeboYethu shares, which will not exceed 14.4 million shares.

3.     YeboYethu will only purchase shares in Vodacom SA after the public has paid for their shares in YeboYethu.

4.     Assuming full subscription where all the 14.4 million shares of YeboYethu are purchased, YeboYethu will purchase 7.2 million ordinary shares and 82.8 “A” shares from Vodacom SA for the black public. This amount of share capital will be divided into the 14.4 million YeboYethu shares.

5.     One of the main differences between ordinary shares and “A” shares is that ordinary shares will pay immediate dividends to the shareholder whereas the dividends that were supposed to be paid upon the “A” shares will be used to offset the notional debt provided by Vodacom SA        to purchase the shares. This will be discussed in detail later.

6.      The least amount of YeboYethu shares that one can purchase is 100 shares at the price of R2,500.

7.     The 6.5% of Vodacom SA which facilitates R7.5 billion worth of exposure to the shareholders comprises of a 10% discount at R750 million, R5.85 billion in a notional financing scheme to pay for the “A” shares discussed above as well as the payment of the shareholders for the balance. This notional loan will last for seven years with 10% interest compounded semi-annually.

8.     Vodacom SA maintains a Call Option to repurchase an unspecified amount of shares at the par value of R.00,001 in the event that the notional outstanding is not realized. In simpler terms, this means that if the total amount of the notional loan is not paid off completely through the notional dividends from the “A” shares during the 7-year Facilitation Period, Vodacom SA will reclaim that amount of shares that will settle the remaining debt. There is a specific formula set to achieve this.

To facilitate a clearer understanding of how this scheme works, we will present the following example where a person purchases 100 YeboYethu shares where the full subscription of the shares has been realized:

One bundle of the 100 YeboYethu shares represents 50 ordinary shares and 575 “A” shares in Vodacom SA assuming that Vodacom SA does not exercise its call option. The R2,500 that a person pays for the 100 YeboYethu shares actually facilitates an exposure to R15,625 in the share capital of Vodacom SA. This is achieved by the R2,500 payment by the shareholder, the 10% discount of R1,563 from Vodacom and a R11,562 notional loan for the “A” shares.

R  2,500

R  1,563

R11,562

R15,625

The R2,500 in essence is purchasing the 50 ordinary shares enabling the shareholder to immediate dividends when and if declared by Vodacom SA and YeboYethu. For the remaining 575 “A” shares, Vodacom SA extends a notional loan of R11,562 to the shareholders to facilitate the purchase. This notional loan will also bear 10% interest that will be compounded annually in arrears. The dividends that should have been paid to the shareholder for these “A” shares will be used to offset the notional loan. These unpaid dividends will also be increased at the rate of 10% annually. At the inception of this finance scheme, the notional outstanding debt per share is R20.10 (R11,562  575). This notional outstanding of R20.10 per share will increase with interest at the annual rate of 10% compounded semi-annually. Conversely, the notional dividend that is supposed to be paid per share will also increase at the annual 10% rate and it will be used to offset the debt. The notional loan or financing scheme lasts for a period of seven years termed and the “Facilitation Period”. If the amount of the notional dividends per share match the notional debt and the outstanding amount becomes nil upon completion of the Facilitation Period, then the shareholder will maintain all of his or her “A” shares. However, if the notional dividends do not suffice to fully cover the notional debt, then Vodacom SA will have the right to exercise its call option. The call option entitles Vodacom SA to repurchase its shares at the par value of R0.001 per share. This call option is designed to offset the remainder of the notional debt. The formula instituted to achieve this realization of the notional outstanding is:

N =   A

N = the number of shares in respect of which the call option may be exercised

NO = notional outstanding (amount of notional debt not offset by the dividends)

FM = the fair market value of the company after the seven years divided by the total amount of “A” shares and ordinary shares in issue.

A = the number of “A” shares held by YeboYethu on the date of the call option.[1]

Hereunder is a hypothetical example to explain how the call option will be calculated in respect to individual shareholders assuming that the notional outstanding is R30 per share and the fair market value of each share is calculated to be R50 and the shareholder purchased 575 “A” shares. 

N =   575 = 345 shares

30  50 = 0.6

0.6  575 = 345

Therefore, Vodacom SA will have the right to exercise its call option and reclaim 345 “A” from this shareholder at par value of R0.00,001 per share. This leaves the shareholder with a balance of 230 “A” shares and his 50 ordinary shares.

In another example, if the notional outstanding was R20 per share and the fair market value remained the same, the amount of shares in the call option would total 230; therefore, the shareholder will only be left with 345 “A” shares and his 50 ordinary shares.

N =   575 = 230 shares

20 50 = 0.4

0.4  575 = 230

Considering the fact that both the notional outstanding (NO) and the fair market value of the shares (FM) are inconstant variables whose amounts will only be known at the expiry of the facilitation period of seven years, this formula will constitute Gharar (uncertainty) in the amount of shares being purchased by YeboYethu and the shareholders. This will be in such a case where the call option is perceived as affecting the quantity of the Mabī‘ from the inception of the sale. However, if one were to consider the sale valid from the inception by considering the Mabī‘ to be specified, for example at 575 “A” shares, then this call option will constitute such a Shart Fāsid that will corrupt the contract. In either case, such an investment scheme will not be permissible.

The second obvious element that corrupts this scheme is the element of Ribā. The “A” shares are financed by Vodacom SA for the shareholder with a 10% interest rate. Furthermore, the notional dividends are also inflated at the same percentage. The fact that such a financing scheme is deemed notional does not prevent it from corrupting the contract due to the interest rate and debt having an overall effect upon the number of shares issued to the shareholder and the number of shares repurchased and cancelled by Vodacom SA. This will have a proportionate reciprocal effect on the percentage of the shareholding held by the Vodacom Group who is the other “partner” in this “partnership”.  As in the above-mentioned example, if Vodacom SA was entitled to reclaim 345 “A” shares per every 575 and assuming that the original full subscription of 7.2 million ordinary shares and 82.8 million “A” shares were realized, Vodacom would reclaim 49,680,000 “A” shares and cancel them from their issued shares. When this amount of shares is cancelled by Vodacom SA, the percentage of the shareholding of the Vodacom group will naturally increase raising their percentage of ownership from the previous 93.75% to perhaps 96% or 97%. This will bear a great impact upon the profit distribution of Vodacom SA to its “partners”.  

It is not permissible to invest in shares generally and in the case of Vodacom’s YeboYethu, it will not be permissible even in accordance to such ‘Ulamā that normally deem shares permissible.

And Allah knows best

Wassalam

Ml. Yusuf bin Yaqub,
Student Darul Iftaa

Checked and Approved by:

Mufti Ebrahim Desai
Darul Iftaa, Madrassah In'aamiyyah